House of Commons Issue No. 16

Minutes of Proceedings and Evidence of the Standing Committee on Foreign and International Trade

0945

[Traduction en français]
I think the time has now come to acknowledge,
particularly in an age of very well-developed private
capital markets, the ability of the leading developing
countries and virtually all of the post-communist
societies to meet their needs through private
commercial mechanisms, leaving the international
financial institutions, the inter-governmental system,
to focus, above all, on Africa and the poorest of the
poor.

This does bear on some very practical questions, most
clearly on the question of the European Bank for
Reconstruction and Development. I think we may be
reaching a stage, for example, where the Czech Republic
simply no longer needs the bank. If all goes well,
Poland will follow in short order, leaving the bank to
focus primarily on Russia as its number one client.
Russia's economic and financial needs can
and should be met by sources other than government
contributions through the EBRD.

It's time to take up the question of a sharpened
priority across the international financial
institutions and multilateral development banks in
lending to other governments and ensuring that these
funds are not used in the aggregate economic management
to perpetuate large military establishments and large
military spending.
I think there is a broad consensus on the rationality
of this as we move into the post-Cold-War period. The
idea was strongly endorsed by the recent commission on
global governance, and in summits past it was certainly
looked upon with great favour by the major powers in
the G-7.

The possibility of moving beyond a focus in lending
toward countries that are following the process of
demilitarization with an active new military diversion
fund to provide a positive reward is also an idea on
the table. But even at the more minimal level, I think
the bias in the system toward national expenditures in
military reduction will provide a broad array of
benefits. That is, of course, an element of emphasis
that none of the international financial or economic
institutions have yet taken up.

We need to focus the international financial
institutions and the multilateral development banks
ever more strongly on the tasks of developing
sustainable development. Much progress has been made
over the years, but I think it is possible to envisage
generalizing the example of the Asian Development Bank.
It has a commitment that by 1997, for example, over
50% of its lending will be to the traditionally
considered softer areas of projects that support the
empowerment of women, the preservation and enhancement
of ecological capital, and social equity.

We can move beyond that as well to broaden the
transparency of the international financial
institutions themselves. One idea that bears
worthwhile consideration is to see whether or not a
government like Canada, which has recently introduced
at the national level a commissioner for sustainable
development, might see if there is a consensus amongst
our G-7 colleagues for instituting commissioners for
sustainable development within the major international
financial institutions and multilateral development
banks. That would provide a permanent presence to
ensure that the modern values of sustainability are
actually reflected to the degree these institutions
themselves proclaim they should be.

Further, we need to look at the more micro questions
of governance and management in the multilateral
development banks and international financial
institutions. In 1945 when the Bretton Woods system
was created, it was overwhelmingly rational to ensure
that in the case of the World Bank, for example, the
president of the institution would always be an
American citizen, often drawn from the Congress of the
United States; that the institution would be
headquartered in Washington.
In a world in which the United States was
overwhelmingly the only major capital provider in the
international system, with the recent worries of
isolationism from the interwar periods, that was a wise
judgment.

0950

But 50 years later we are now in a world
where the United States is providing only about 17% of
the capital of the World Bank and where the World Bank
family has evolved an array of other institutions--the
International Finance Corporation, the Multilateral
Investment Guarantee Agency, the International
Development Association--with a broader array of purposes
and a much more diverse base of funding sources.

That process of broadening has begun. A Japanese
national now heads the Multilateral Investment
Guarantee Agency.
I think it is a process that would
continue. If one were looking for
candidates to take us to the next stage of this
diversification, the International Finance
Corporation is an institution worthy of closer
examination.

There is no reason why the International
Financial Corporation, part of the World Bank family
but with a very private sector orientation, needs to be
headquartered within the beltway in Washington, D.C.
and continue to be governed by a structure headed by an
American national.

Next, I think we should look at the missing pillar of
the Bretton Woods institution, the advantages of
creating a global environmental organization. I'll
elaborate on that thought in the question period,
if there is any
further interest in it.

I would like to end with one final thought, and that
relates
to the role of the G-7 system itself.
In the course of your discussions you will
encounter a number of
well-meaning suggestions for broadening the membership
of or participation in the G-7 itself. These
should be treated with extreme caution.

Most of these
claims are not made on the basis of a need for broader
representation or participation to improve the
efficiency or effectiveness of the G-7. They are made
rather on the grounds of the desirability of expanded
representativeness.

The primary reason for caution is that in a world with
so many international institutions that have as their
central mission offering that representativeness to
members of the international community, to usurp that
function from them by having the G-7 address it would
be a major strategic mistake.

There is, however, some room for further
deepening the G-7 system itself institutionally, in
part to deal with the new issues of finance and
economics the world is facing. I can return to
those in the question period, if there is interest.

The Chairman: Thank you very much, Professor
Kirton, for a very broad-ranging and thoughtful
presentation.

I'm very happy to be before this committee again. My
remarks will relate principally to the substance of the
G-7 summit as it relates to the international financial
institutions and the process through which reform
activities take place.

It is something of a cliché now that the world economy
has become massively globalized to a degree that no one
could have imagined 50 years ago at the time of the
initial Bretton Woods conference.

In particular, capital
and financial markets have become truly global to
the degree that what would have been considered a
relatively minor eruption in a middle-sized
country--Mexico in
the middle of December--struck terror
in the financial markets around
the world.

Yet despite the globalization of the economy through
markets, the global economy is remarkably
undergoverned.
The public goods
national government supply to make domestic economies
at the national level function more effectively are
only weakly supplied at the global
level, if they are supplied at all.

0955

I speak of public goods in the form of rules, laws,
stability, crisis management and greater equity, not
the least greater equity.

As far as the IMF and World Bank are concerned,
three principal public goods are at
issue: macroeconomic management at the global
level; the provision of adequate liquidity for the
globe; and the provision of development
finance. These three public goods cannot be
adequately supplied by markets.

Market failure in macromanagement, the provision of
adequate liquidity and the provision of development
finance for those who cannot acquire finance on
markets is the reason that at the national level we
have established effective central banks and effective
financial institutions in which the state plays a role.
This is a prudential, supervisory role that sometimes
involves direct
financial contributions.

That there should be a review process under way 50
years after the Bretton Woods conference is entirely
appropriate. It is also 50 years after the formation of the
United Nations.

During the past couple
of years there have been innumerable
conferences and papers written on these subjects.
They typically detail the
enormous changes, both in the sphere of economics and
international politics, that have taken place over the
past 50 years.

They call attention to the weaknesses,
not least in the sphere of trade in which we have at
last just
established what I would not describe as a
Bretton Woods institution. The World Trade
Organization is perhaps a Marrakesh institution, but
more appropriately a Havana institution,
a final completion of a process that began at a
conference in Havana in 1947.

One of the issues is how this new institution with its
own governance practices quite different from those of
the IMF and World Bank will interact with the IMF
and World Bank. This new institution also has
considerable overlap in its functions, particularly as
it relates to the handling, regulation and
supervision of financial services.

Also relevant to a consideration at the 50-year
point is the role of the other United Nations
organizations as they have evolved. The UN Economic
and Social Council, the UN Conference on Trade and
Development, and a host of other UN bodies and
agencies have appeared upon the scene, and generally
speaking the UN agencies, exclusive of the IMF and
World Bank, which are strictly UN agencies themselves,
have not developed the strength that was originally
contemplated for them.

The question arises how, if at all, UNICEF, the
World Health Organization, the UNDP and other
effective UN bodies are to be best employed at the
international level in their interaction with the most
powerful and most central bodies, which are today the
product of history: the IMF and the World Bank.

That raises questions that are relevant at the
national level. Which national government agencies
are best equipped to interact with the central
institutions on these
international and global issues?

At present national governments typically interact
with the most powerful central agencies
through departments of finance. That may be entirely
appropriate; however, departments of finance typically
devote only second-order importance to longer-term
development questions, to many of the issues that are
primary in UN agencies such as UNICEF, FAO and
the World Food Program.

Finance departments have to deal with annual budgets,
they have to battle with financial markets in the short
term--not the long term--and they have not typically
been seen by those who erected the original United
Nations machinery as likely
sources of long-term vision or long-term development
interests at the global level.